Is Kathleen Sebelius Listening to the NCPA?

Apparently so. But she’s only understood half the message.

For several years now, NCPA scholars have been calling for a radical change in how Medicare pays doctors and hospitals — in The Wall Street Journal, in NCPA publications and at this blog.

Apparently so. But she’s only understood half the message.

For several years now, NCPA scholars have been calling for a radical change in how Medicare pays doctors and hospitals — in The Wall Street Journal, in NCPA publications and at this blog.

Here’s the idea: Instead of having Medicare fix millions of prices for predetermined packages of care, we should allow providers the opportunity to produce better care and cheaper care by repackaging and re-pricing their services. Everyone on the provider side should be encouraged to make Medicare a better offer. Medicare should accept these offers provided that (1) the total cost to government does not increase, (2) patient quality of care does not decrease and (3) the provider proposes a reasonable method of assuring that (1) and (2) have been satisfied.

Instead of maximizing against reimbursement formulas, doctors and hospitals would be encouraged to discover more efficient ways of providing care. They would be able to make more money for themselves as long as they save taxpayers money and patients don’t suffer.

Last week Secretary Sebelius seemed to indicate she has heard the call. Going forward, providers will be able to offer to perform heart surgery and other procedures for a lump sum (bundled) price covering all aspects of the procedure and (like Priceline) they can name their own price! Medicare will accept the offer if taxpayers are likely to come out ahead on the deal.

Unfortunately, Medicare will dictate what the bundles will look like. Providers will be able to re-price, but not repackage. You might think this represents progress for people who were previously pushing pay-for-performance and other command-and-control strategies designed inside the Washington Beltway. Yet, ironically, re-pricing without repackaging could actually make things worse.

I’ve tried and tried

To say what’s on my mind

First, let’s give the devil its due. How can such a reform produce savings? Let’s say there are six members of a team involved in treating a heart attack patient, but with efficient care five could have done the job. If the six are independently billing Medicare, no one has an incentive to sacrifice his own income so that care can be more efficient. But, if they can cooperate and bill Medicare a single fee (to be shared by the group) they can free one person per episode for other income-earning opportunities. They can then split the total income among themselves in a way that leaves everyone better off.

This is in the nature of all efficiencies by the way. Becoming more efficient always produces a surplus for producers as a whole. In health care, that surplus could in principle be used to lower Medicare’s cost and give doctors more take-home pay as a result.

More details on how the pricing system will work can be found here. The federal government has experimented with Medicare bundled payments since 2009 in a demonstration program at Hillcrest Medical Center in Tulsa and produced Medicare savings of 3%. That’s a far cry from the 30% waste that most of us think is in the system, however.

Why are the savings so puny? Answer: because this type of reform is focused on the least important thing that needs to be changed. Being able to repackage the bundles of care has far more potential for cost reduction than re-pricing a bundle dictated by Medicare.

To appreciate what the freedom to repackage might mean, consider Geisinger Health System in Central Pennsylvania. It offers a 90-day warranty on heart surgery, similar to the type of warranties found in consumer product markets. If the patient returns with complications during that period, Geisinger promises to provide treatment without sending the patient or the insurer another bill.

Instead of offering a bundle called “heart surgery,” therefore, Geisinger is offering a bundle called “heart surgery with a warranty.”

Under the current system, Geisinger loses money on its warranties, even as it saves money for Medicare overall. This is because health care organizations like Geisinger are paid more when patients have complications that lead to more visits, more tests and more readmissions. (Most hospitals make money on their mistakes!) What is needed is a willingness to pay for such guarantees. But unless Medicare is willing to allow Geisinger-type re-bundling along with re-pricing, other hospitals will have no incentive to follow in Geisinger’s footsteps.

Another example of the potential for re-bundling is the highly successful experiment in Asheville, North Carolina where pharmacists counsel diabetic patients and encourage them to take appropriate medications. In this case, the provider is offering a new package of services (traditional pharmacy plus some primary care services) — one which reduces trips to emergency rooms and to the offices of primary care physicians and lowers overall costs. Unless Medicare offers pharmacists in other cities the opportunity to make money by re-bundling in this way, however, the potential for savings will be missed.

We have frequently mentioned the case of Dr. Jeffrey Brenner, who is saving millions of dollars for Medicare and Medicaid in Camden, New Jersey by providing what is largely a bundle of social work services (not on Medicare’s price list) designed to keep high-cost patients healthier and out of hospitals. There will be very few physicians following in Brenner’s footsteps, however, as long as Medicare refuses to pay for innovative bundles such as these.

Let’s take a primary care example, previously posted at this site.  A clinic drew up a blueprint to shift a large portion of doctor duties to nurses, allowing the doctors to focus on more complicated problems, for which their training is needed. They then ran their model through a computer to see how it would have affected last year’s income. The result: there was virtually no improvement. The reason: every time a task was shifted to a nurse, Medicare’s payment rate went down, destroying any potential income gain.

We cannot solve this problem by inviting the clinic to underbid Medicare’s current price list. We solve it by allowing the clinic to offer a doctor/nurse package with acceptable quality for a price well below the price Medicare would pay for the all-doctor package.

In the area of primary care there are numerous other examples of opportunities to repackage or re-bundle in cost reducing ways. As I pointed out in The Wall Street Journal the other day:

• Walk-in clinics offer a bundle of nurse-provided primary care, less expensive than the same care delivered at traditional primary care physician’s offices or hospital emergency rooms.
• TelaDoc and other companies offer a bundle of telephone and e-mail consultations, less expensive than the same care in traditional settings.
• Some concierge doctors offer a bundle of services (same day appointments, telephone and email consultations, electronic medical records, etc.) that the Commonwealth Fund describes as ideal when the doctors providing them live in some other country.

Will the new re-pricing scheme allow providers of these services to name their own price and submit bids to Medicare? I’m afraid they will not. And if they don’t, one has to wonder what the real purpose of the whole exercise is.

That brings us to why we ought to be suspicious. Let’s think about how the Sebelius reform might actually make things worse. The whole scheme would be a huge step backwards if:

• It completely ignores and excludes the innovative bundling I’ve been describing and other examples like them.
• It continues to enforce the Stark rules which effectively prohibit physicians and hospitals from cooperating and sharing in the profits from bundled services unless the physician is an employee of the hospital.
• It suspends the Stark prohibitions only for physicians who are practicing in Accountable Care Organizations, subject to a 427-page book of rules.

If these suppositions are all true, then we would be left with a scheme to induce the consolidation of medical care into large organizations of salaried doctors, subject to all kinds of bureaucratic controls. What appears to be an act of liberating the supply side of medical care could in reality be a clever ruse to enslave them by coaxing them into accepting the building blocks of ObamaCare.